US Fed loses its ‘patience’, investors prepare for rate lift-off

The US Federal Reserve has erased the word ‘patient’ from its language when referring to its interest rate hikes, signaling the bank is ready to raise rates in June, but no sooner.

“Today’s modification of our guidance should not be
interpreted to mean we have decided on the timing of our
increase,” Fed Chair Janet Yellen said in a news conference
following Wednesday's statement.

“Just because we removed the word ‘patient’ from the
statement doesn’t mean we are impatient,” the bank chief
said.

‘Patient’ was economic policy speak that was used during the
financial crisis, recession, and recovery periods to ensure
investors that the bank planned to keep rates near zero, where
they have been since 2008.

Stock markets greeted the news positively, with most indexes
reversing earlier losses and closing higher Wednesday. The dollar
first dropped on the news, but since has recovered.

Vroom vroom. Dollar motors back from its post-Fed tumble. Euro
back down to $1.0650, where it was pre-Yellen: pic.twitter.com/UN4rnatYOG

The Dow closed above 18000. On the flip side, US Treasury bonds
felt pain, dipping below 2 percent for the first time since March
2.

In the quarterly summary, the Fed cuts its inflation target for
2015, as the strong US dollar, weak oil, and reduced US economic
growth could all lower it to 2 percent.

Many worry the Fed is acting too quickly. One strong opponent of
a rate hike is Ray Dalio, head of the world’s largest hedge fund
Bridgewater Associates. He warned investors there could be a
financial massacre if the bank raises rates too fast.

The Fed raised rates 8 years after the 1929 crash, however, the
rate hike happened too soon, and the Dow lost half of its value
between 1937 and 1938.

Yellen has continued the tradition of near-zero rates since she
took over the helm of the central bank in February 2014.

Race to the bottom

A higher interest rate usually means investors get a higher
return on sovereign credit, or bonds, so investors are waiting
for interest rate rises. Many are hoping to shift their money
from Europe, where central banks have already ventured into
negative interest rates, or a so-called ‘race to the bottom’.

“Keeping US interest rates low is also a signal to the rest
of the world that the race to the bottom hasn’t stopped,”
Timur Turalov, the general director of Freedom Finance, a
Moscow-based Investment firm, said in an emailed note Thursday.

“We will be in a situation of surplus money supply and
inflation for a while and the world’s largest economies will
compete with each other on these indicators,” Turalov said.

Switzerland, Denmark, and Sweden all cut
lending rates below zero, in what is viewed as an alternative to
quantitative easing – the monetary policy the US, Japan, and the
EU have embraced.

After the financial crisis hit the US stock market, US share
indexes tumbled. The Federal Reserve fought back with low
interest rates and a stimulus plan, which ushered in recovery in
the stock market and the economy.

“These rates will spur slow inflation- and this is the new
reality that all of us will have to get used to. In this respect,
stocks in multinational companies are seen as the only investment
that can protect us from this race. Record high stock indexes we
see today are proof of this,” Turalov said.